Goldman Sachs' Technical Analysis Team is concerned as signals from the equity (S&P), volatility (VIX), and credit (CDX IG) markets are suggesting this is more than a brief dip to buy.
The index has finally seen follow-through since the bearish key day reversal high on Tuesday. The balance of signals suggest potential to have started a period of corrective price action (overlapping/ lower).
a) S&P Intraday/Daily – There was some small attempt at a relief rally on the day following the key day pattern (Wednesday). Historically, this tends to be the case, prior to seeing continuation of the initial decline. As previously discussed, seven of the past seven bearish key day reversals have had some follow-through in trend (between 1 and 4%). With this in mind, the index is now right on top of a trendline formed across the lows since May as well as a minor ABC target at 2,448-2,446. The next two retrace levels below there come in at 2,429 and 2,391 (38.2% and 61.8% since April). And if this is truly a 4th wave to a sequence that started in Feb. ‘16, it has scope to run as far as ~2,368 over time. This would mean retracing 23.6% of the length of wave 3 since June. It’s worth noting that wave 2 (the Jun. 7th/27th ’16 selloff) was fairly sharp/quick. This would imply that wave 4 could be more complex and take time to fully materialize.
View: Focus shifting lower. Next immediate support at 2,448-2,446. Retrace levels at 2,429 and 2,391. Scope to eventually see 2,368. Likely complex/ time-consuming.
b) S&P Weekly – The index has also come into two longer term pivots at 2,452-2,478. This area includes a 2.618 extension target for wave III from ’09 as well a target for wave 3/(5) from Feb. ’16. Weekly oscillators are on track to diverging negatively against the new trend highs; this has been a reliable signal in the past. Finally, the market is on track to forming a bearish key week reversal if Friday’s close settles below 2,472.
All in all, the balance of signals suggest there’s scope for some corrective price action.
Seeing similar “risk-off” type signals from the vol market. These have tended to work well in the past, suggesting that a possible turn/correction is likely underway.
a) VIX Daily – Currently testing trendline resistance at 14.41. This level acts as the top of a declining wedge that’s been in place since the Jan. ’16 highs. Wedges tend to be long-term reversal patterns which often see quick/sharp break-outs. These are also often associated with material/lasting trend shifts. The next level in focus is 16.22-16.48; this includes the April/May highs and a 2.168 extension from July. Getting a break above this would damage the existing trend of lower lows/lower highs and significantly increase immediate topside risks. Anything back underneath the 200-dma (11.98) would signal near-term stability.
View: Keeping an eye on 14.41 resistance. Topside risks heighten significantly through 16.22-16.48. Need below the 200-dma 11.98 to signal near-term stability.
b) UXA Daily – It’s worth watching the active contract for additional signal. The index happens to be breaking its respective downtrend since Jan. ’17 (12.57). It’s also through the 55-dma which is down at 12.518. This trendline/55-dma combination has held a number of previous tests in recent months, adding conviction to the fact that real damage may have been done to the immediate trend. Would need to see the index back underneath Wednesday’s high 12.61 to signal a possible reversal/false break.
CDX IG Spreads
This too seems to be breaking from a declining wedge. All of this adding to mounting evidence that a broader trend shift may be taking place.
a) CDX IG Daily – Currently wider than the trend across the highs since Jun. ’16 (60.39). This trendline has held on multiple recent occasions. The break also comes after the completion of a 5-wave decline since March, further encouraging the notion that this may have started a meaningful reversal (towards wider levels). As previously discussed, wedges tend to see sharp/quick breakouts in the opposite direction to the preceding trend. The next level to watch from here is 63.32; the interim high from Jul. 7th. The 200-dma is above there at 65.12; the market hasn’t seen a close above this moving average since the Jun. ’16 wides (right when the wedge initiated). At this point, spreads would have to narrow back under 60.39 (prior wedge resistance) to imply that this was a false breakout.
View: Break above 60.39 signals potential for a trend shift towards wider levels. Next in focus 63.32 and 65.12. Risks heighten above these levels. Re-assess below 60.39.
b) CDX IG Weekly – There are two interesting points to make about the longer term chart. Firstly that this wedge is considered the C wave of an ABC that began at the Feb. ’16 wides, suggesting that a turn could be something more material/lasting. The second thing to mention (outside of Elliott wave theory) is that wedges have worked in the past on this particular asset. A similar wedge formed from Jun. ’12 through Sep. ’14. The eventual breakout in Sep. ’14 initiated a widening target of 129.43 (back where the wedge started). The high from Feb. ’16 came almost close enough at 127.62. This time around, the wedge gives a projection target of ~92.08 (from Jul. ’16).
While it’s still very early days, it’s certainly something to keep in mind; particularly if the breakout is sustained.